Holiday shoppers looking for discount technology gifts will be in luck this year it seems.
This weekend, the Wall Street Journal reported that Amazon.com, Inc. (NASDAQ:AMZN) will be introducing tablets with a price tag as low as $50. The low pricing will only apply to the company’s new devices with a small 6-inch screen, but at this discounted price, Amazon is hoping the item will be a popular stocking stuffer for shoppers around the world.
The low priced line of tablets is just another example of Amazon’s longstanding tradition of accepting losses on key products in an attempt to build market share and put competitors out of business.
While there are no concerns that a cheap tablet (with dialed down features) is going to make a dent in holiday revenues for established players like Apple Inc., Amazon could come out on top if the company can successfully convince tablet purchasers to pay for content such as books, music or videos.
Amazon’s tablet introduction comes at an interesting juncture. Earlier this month, Amazon began allowing prime customers to download movies and television episodes to devices (rather than streaming the content). This gives users more flexibility in watching content while on the go.
Now, with a a little advance planning, you can watch your favorite TV episode while riding the train to work, or on that cruise with the expensive wifi rates.
Parents of young children may be especially drawn to the new tablets, which the WSJ refers to as “disposable.” Not only can they pre-load shows on to the devices ahead of a car trip, if the child drops the device out the window, it’s not a huge financial loss.
Amazon also managed to introduce these new scaled-down tablets before Apple released its line of gadgets ahead of the holiday season.
More Value for Prime Members, More Competition for Content Providers
With ultra-cheap pricing for devices, and more flexibility for Amazon prime members, we expect the company to report strong prime enrollment numbers for the second and third quarter.
An influx of subscribers to Amazon prime could present significant challenges for other content providers such as Netflix and Pandora. Both Amazon’s streaming video service and streaming music service has the potential to cut into these two rivals’ revenue. And with Amazon’s bundled services and growing ease of use, it is becoming harder for these two content providers to compete.
While the introduction of cheap tablets may help Amazon win more customers (and build larger profits from other business lines), we’re not fans of owning AMZN shares right now.
Too Much Potential, Not Enough Value
The company is currently trading near $515 per share, even while analysts expect the company to earn $1.61 per share this year and $4.95 per share next year. The good news is that analyst estimates have been rising sharply over the last three months. (Table via Yahoo Finance)
The bad news is that even based on next year’s robust growth expectations, investors are still paying more than 100 times earnings for this company.
Sure, as Amazon grows its market share in many different lines of business, the company could raise prices at any time and boost profits. But there is also the risk that Amazon will continue to use it’s strong financial position to enter more markets, delaying material profitability another year or two.
This “new frontier” approach has become the standard for Jeff Bezos, Amazon’s CEO. The problem with investing in AMZN at the current valuation is that investors could easily get discouraged by a new “loss leader” strategy by the company, or even the announcement of big profit growth (if the growth isn’t as large as optimistic investors were expecting.
A Bearish Environment for Content Competition
Although we’re not willing to buy shares of AMZN at current valuations, we do believe AMZN’s latest moves should put significant pressures on competitors.
Shares of Pandora and Netflix could trade sharply lower not only because of AMZN’s potential to cut into their business, but also because of the heightened level of fear in the market.
Following the market downturn in August, investors will likely be looking for ways to cut risk in their investment portfolio. With Netflix trading at a multiple north of 300 times next year’s earnings, and Pandora facing pressure from Amazon, Spotify, and Apple all at once, these two companies could be easy choices when it comes to deciding which positions to sell.
Thankfully, option premiums are still high as traders expect more volatility for stock prices. This gives traders an opportunity to set up bearish income positions such as bear put spreads, or even selling call contracts against these stocks. With investor fear levels high, and competitive forces growing, Amazon has given us a great catalyst for potential bearish entry points.
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